Ung

They should not be touting these commodity ETF's as "investments" for "diversification" -- clearly it's just a short term trading vehicle.
 
Quote from cokezero:

We're trying to buy natural gas here. The spot price (the real stuff) of NatGas today is 3.55 as we speak. The July future contract is trading at $3.9, the August contract $4.01, Sep $4.1 ...etc all the way to Jan 2010 $5.95. The price of the future is higher due to cost of carry, interest, and also expectation of supply/demand.

Each day the premium of your futures contract slowly erodes away towards spot price. By the end of July your July contract is going to expire at the same price as spot. So if the price of spot is unchanged during July you will still lose money on cost of carry and interest which is usually a relatively small amount.

However the current situation is that this premium is huge. If we look at the July contract the premium over spot is $0.34 that's 10% for less than 2 month! The reason is that people expect future price of Natgas to be higher than the current price and are actually storing it up instead of selling it in spot market.

If you buy a July future at $3.9 that means you will only make money when spot Natgas is above $3.9 by end of July.
Of course you can still make money but it's going to cost you 10% no matter what. This is the same case if you want to hold for 6 months. NatGas price (spot) has to go to $5.95 for you to breakeven. To give you an idea, the Jan 2011 contract is trading at $7.3 - More than double the current price. So even if NatGas doubles in 18 months you're still only breakeven holding futures.

Buying UNG is just the same as holding futures and rolling over each month. There is no difference except you have to pay an extra 0.5% management fee.

A great example is crude oil. If you look at crude oil the futures hit bottom on Feb 12, 2009. The future price at that time was $33.5. Today it's trading at ~$65 almost double the low. The case is similar for spot crude it almost doubled since Feb. However if you look at USO the crude oil ETF it's Feb low (on 19th) was $22.74 and right now it's around $36 - just 58% increase. So in short Crude oil had doubled since Feb but if you invest in USO all you get is a 58% return. The difference is due to the roll over cost.

I'm also bullish in NatGas as well and what I did was to buy natural gas producer stocks. I am not sure if it's the smartest way but it's the smartest way I could think of so that's what I did.

I hope this would help.
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great explanation, perfectly crystal clear. thanks so much for taking the time!!

so i am assuming yes, this is not biz as usual for UNG with the contango going way beyond normal carrying cost, supply/demand premiums? if you traded it back in 2008, was it just that there was a much smaller premium to cover each roll forward or it was just ripping up so quickly that it didn't matter?

i may trade in the UNG or as it is as close as i am going to get to actually owning NG without the headache of futures, just add a few fundamentally sound related stocks(APC, WMB, OXY). any other stock ideas for me to look at are of course welcomed.

again, thanks so much for the words of natty enlightenment:D

and welcome to the travelboysteve new guy
 
Quote from Klamath:

That's similar to something I've been wondering about with inverse ETFs. Wouldn't it always be better to go short the long ETF than long the inverse, since then you would have fees, expenses, trading costs etc. working for you instead of against?
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good point, like if you are holding the position overnight and getting short interest as opposed to just buying SDS or whatever and getting unnecessarily reamed by the long margin interest.
 
Quote from colonelangus:

great explanation, perfectly crystal clear. thanks so much for taking the time!!

so i am assuming yes, this is not biz as usual for UNG with the contango going way beyond normal carrying cost, supply/demand premiums? if you traded it back in 2008, was it just that there was a much smaller premium to cover each roll forward or it was just ripping up so quickly that it didn't matter?

i may trade in the UNG or as it is as close as i am going to get to actually owning NG without the headache of futures, just add a few fundamentally sound related stocks(APC, WMB, OXY). any other stock ideas for me to look at are of course welcomed.

again, thanks so much for the words of natty enlightenment:D

and welcome to the travelboysteve new guy
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For the bulk of my holdings:
I like holding solid company stocks that meet certain criteria, and ETF's in US and foreign markets.
I like what other countries are doing and have been doing and there are a few stocks, ETF's that are worth looking at.
I think there are like 715 ETF's, but I only look at certain types in certain sectors, (depends on timeframe of hold) and make sure they are optionable.
I enjoy the "sure and steady" along with my diet of excitement.
Thanks Colonel for the welcome,.....
Cheers
 
Quote from colonelangus:

great explanation, perfectly crystal clear. thanks so much for taking the time!!

so i am assuming yes, this is not biz as usual for UNG with the contango going way beyond normal carrying cost, supply/demand premiums? if you traded it back in 2008, was it just that there was a much smaller premium to cover each roll forward or it was just ripping up so quickly that it didn't matter?

i may trade in the UNG or as it is as close as i am going to get to actually owning NG without the headache of futures, just add a few fundamentally sound related stocks(APC, WMB, OXY). any other stock ideas for me to look at are of course welcomed.

again, thanks so much for the words of natty enlightenment:D

and welcome to the travelboysteve new guy
More...

Even buying futures will only get us the same result as buying UNG. The above crude oil example of $33.5 low was the Feb contract and today's price of $66.5 is the July contract. So during that time we would have to rolled over a few times and lost part of the profit (with each roll over it cost us the premium). So buying crude oil futures in feb and roll over would get us the same return as USO (~58%) instead of doubling our return. What USO does is to buy futures contracts for you and it roll over and charge you a small management fee for doing that.

The only way to get the full return is to store up physical crude. This is what many funds do today. They rent tankers and store up physical crude to take advantage of the contango structure. If you look at the oil tanker rate they're going way up. Oil producers are doing the same thing and renting more storage facility to store up physicals. So we can be pretty sure crude and natgas physicals are going up in the mid term (say next year or two). We just don't know if it would go up enough to cover the roll over cost. I suspect it would go way up and we can still make good money with futures and ETFs. Just that the cost seems very high especially for Natgas.

Unforturately for us little guys there is no way to take full advantage of the ultra low crude (in feb) and natural gas price (today). USO and UNG unlike GLD are not storing up actual physicals in a facility. All they do is to buy futures contracts and trying to "track" the price of the physicals using futures. I've searched quite a bit but I cannot find any Crude or NatGas ETF that have physical storage. I don't think it exist otherwise I would have buy an ETF with physical storage rather than buying oil/gas producer stocks.

If anyone know of a viable way to own physical natgas please let me know!!!
 
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